Liquidator Cannot Cancel a Valid Auction in Anticipation of Higher Bid

In the case of Eva Agro Feeds Private Limited v. Punjab National Bank and Another [2023 SCC OnLine 1138], decided on September 6, 2023, the Supreme Court ruled that a liquidator does not have absolute discretion to cancel a valid auction on the sole expectation of higher bids. The Court clarified that inclusion of para 1(11A) in Schedule I to the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Regulations”), established the necessity of providing reasons for rejecting the highest bid in accordance with the Regulations.

In the instant case, Huvepharma Sea (Pune) Private Limited submitted an application under Section 9 of the Insolvency Bankruptcy Code, 2016 to initiate the corporate insolvency resolution process against Amrit Feeds Limited. Following this application, the Tribunal issued an order for liquidation on February 19, 2021, appointing Respondent 2 as the Liquidator.

An auction notice was published to announce the sale of the assets belonging to the corporate debtor. The appellant, Eva Agro Feeds Private Limited, submitted its bid for this auction on July 19, 2021, before the bid due date scheduled on July 20, 2021, and made a payment of Rs. 1 crore as an earnest money deposit for the property being auctioned. On July 20, 2021, the appellant was provided with an E-auction certificate confirming their successful bid in the auction. Subsequently, the appellant made a request to Respondent 2 for the issuance of an allotment letter pertaining to the property in question. However, the appellant received a notification on July 21, 2021, informing them that the E-auction scheduled for July 20, 2021, had been cancelled in accordance with Clause 3(k) of the Disclaimer Clause stated in the E-Auction Process Information Document. The notification also mentioned that a new E-auction would be organised.

Aggrieved by this, the appellant filed an application before the Tribunal, directing the Liquidator (Respondent 2) to send a communication to the appellant requiring them to deposit the balance sale consideration. The appellant deposited the entire sum pursuant to which Respondent 2 issued a sale certificate in respect of the subject property. However, Punjab National Bank (Respondent No. 1), one of the financial creditors, appealed against this order. The Appellate Tribunal allowed the appeal, setting aside the original order and instructing the Liquidator to initiate a fresh auction process. Displeased with this decision, the appellant filed the present appeal.

Respondent 1 (Punjab National Bank) contended that the current appeal should be dismissed. They argued that the order of the Appellate Tribunal upholding the decision of the Liquidator to cancel the auction sale is justified under Clause 3(k) of the Disclaimer Clause of the E-Auction Process Information Document, which gives the Liquidator the absolute right to accept or reject any/all of the bids or adjourn/postpone/cancel the E-auction at any stage without assigning any reason. According to the respondent, it is a settled position that any auction sale can be cancelled before its completion. As per clauses 1 to 3 of the Regulations an auction sale shall stand completed only once the full amount is paid and not when the highest bidder is asked to furnish the balance sale consideration. Further, Clause 5(m) of the auction sale notice was also relied on as per which, the bidder with the highest offer does not have the right to demand acceptance of its bid.

The Appellant contended that the Tribunal correctly invalidated the decision of the Liquidator (Respondent 2) since the cancellation of the E-auction was without sufficient justification. It was contended that, based on the facts and circumstances of the case, Respondent No. 2 did not have the authority to cancel the auction. The cancellation was argued to be in violation of para 1(12) of Schedule I to the Regulations, as it was illegal and arbitrary. The cancellation of the E-auction after notifying the appellant via email that it had won the bid was argued to be a clear abuse of the process. It was further submitted that Respondent 2 had additionally acknowledged the ruling of the Tribunal by adhering to the order and refraining from submitting any appeals against it.

The court, after considering the arguments presented by both parties and referring to the Regulations, as well as the principles of natural justice, determined that the purpose of these principles is to prevent any unfairness in the legal process. Therefore, unless there are explicit or implied exceptions, an administrative authority that performs judicial or quasi-judicial functions must provide a rationale for its decision.

The court observed that Clause 3(k) of the E-Auction Process Information Document explicitly grants the Liquidator the authority to accept or decline bids, as well as to reschedule, postpone, or cancel the E-auction, without being obligated to provide any justification for such actions. However, it is important to note that this document should be interpreted in conjunction with the provisions outlined in the Insolvency Bankruptcy Code, 2016 and the Regulations. In the event of any inconsistencies or conflicts between the two, the provisions of the Insolvency Bankruptcy Code, 2016 or the Regulations shall always take precedence. A joint reading of these provisions lays down that while the Liquidator has the right to reject any bid, the reason for rejection must be made clear in the order so passed.

The court further stated that ordinarily the highest bid may be accepted by the Liquidator unless there are statutory infirmities in the bidding, or the bidding is collusive in nature or there is an element of fraud in the bidding process.